If you were an employee of Facebook (Nasdaq: FB ) sitting on millions of dollars of paper wealth, how would you feel about the stock's plunge since its IPO? If you're like me, you'd be waiting for the chance to turn those paper dollars into real dollars by dumping shares as fast as you can. Soon, inside investors and employees will get their wish, and the rest of us should be very aware of what it means for us.
In less than a week, some Facebook insiders will get their chance as the lockup period ends for some shares post-IPO. On Aug. 16, about 271 million shares will be able to be sold by insiders, except for Mark Zuckerberg. Another 243 million will be available to be sold between Oct. 15 and Nov. 13. On Nov. 14, the floodgates open and 1.2 billion shares will be freed. Keep in mind that the IPO sold only 180 million shares, so in a week the float will increase substantially.
These are surprisingly important days for investors in IPOs, especially those with a small float. When employees and other investors who were locked up get their chance, they often dump shares, causing the stock price to dive.
When the recent IPOs of Tesla Motors (Nasdaq: TSLA ) , Zipcar (Nasdaq: ZIP ) , Groupon (Nasdaq: GRPN ) , and LinkedIn (NYSE: LNKD ) hit their IPO lockup period expiration, the stocks all fell as shares flooded the market. These didn't have the same staggered lockup like Facebook and instead had a more traditional 180-day lockup.
Date Lockup Period Ended
Share Performance Day After Lockup
Share Performance 1-Month Before Lockup
||Dec. 27, 2010
||Oct. 11, 2011
||June 1 2012
||Nov. 21, 2011
What's interesting to note is that shares also plunged in the month leading up to the lockup expiration as investors anticipated the flood of shares. This could be another factor helping drive shares of Facebook south over the next three months.
Incentive to sell
The majority of Facebook's shares will be able to be sold on Nov. 13, and there is a huge tax incentive to sell before Jan. 1. That's when the long-term capital gains tax will go from 15% to as high as 25% if the Bush-era tax cuts aren't extended.
Whether investors bought shares in a funding round or got them through working at Facebook, this is an extra incentive to sell their stock.
Get out while you can
The history of stock performances after lockups end is mixed, so if I were interested in buying shares I wouldn't be afraid to just because shares dive leading up to Nov. 14. Zipcar rose 6% in the moth following the lockup, while Tesla and Groupon declined slightly. What I would be very wary of is loading up on shares now with a tsunami of Facebook shares hitting the market in the next three months.
Foolish bottom line
There are nuances of the market that investors, especially retail investors, should be aware of and often aren't. The IPO lockup is one of those nuances, and it has a huge impact on how a stock trades and performs around the lockup date.
The shares coming to the market, combined with Facebook's uninspiring financial performance, are enough for me to think shares will underperform the market over the next six months, and I'll back it up with a CAPScall on My CAPS page. You can see the rest of my picks.
For an in-depth look at Facebook and why investors will want to own shares eventually, check out our analyst report on the stock. It comes with a year of updates when big events happen. Get your copy of the report.